What is Business Interruption Insurance?

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Operating in the business world can be fraught with risk, but Canadian businesses have tools at their disposal to offset that threat. One of the essential tools that business owners in Canada have is insurance like business interruption insurance.

A business’s ability to continue to generate income through tough times is vital to a company’s survival, and that’s where business insurance comes in.

When a disaster hits or a physical loss occurs, Canadian companies are covered by insurance policies that will pay to repair the damage or replace items so that their businesses can continue to operate.

This article will explore what business interruption insurance is, what it does and doesn’t cover, and how long the coverage lasts.

Business Interruption Insurance Meaning

Business interruption insurance provides business owners protection against losses that are not specifically excluded from their policy. According to the Insurance Bureau of Canada, such perils can include floods, fires, earthquakes, or windstorms.

Business interruption insurance also covers closures due to curfews or street closings called civil authority ingress/egress. As with all business insurance, the premiums paid on this coverage are tax-deductible.

When faced with an unexpected event or accident, business interruption insurance can be crucial to funding the temporary leave and addressing the issues to get back running. 

What does Business Interruption Insurance cover?

Business interruption insurance covers the items that would not be covered in a traditional business insurance policy, such as repairs to the building or broken items like glass.

This policy covers the financial loss a business experiences when they are not able to operate. Business interruption insurance covers the capital expenses of the business that would continue despite a closure, such as loan payments, payroll to employees, operating expenses, and lost profit. Additionally, taxes are included.

Having business interruption insurance also pays for extra expenses incurred due to the business interruption, such as moving costs. For example, sometimes a business is forced to move to a temporary location until repairs can be completed.

Business interruption insurance would cover the associated costs of moving locations. It would also cover commissions and training expenses incurred from buying new equipment that required training for current employees. 

What does Business Interruption Insurance not cover?

While business interruption insurance covers most of the unexpected costs incurred after a disaster, some things do not qualify for payment. Items listed on another policy, such as broken glass, physical damage caused by the event, and utilities, will not be repaid. Income that is not reported in a company’s financial records is also not covered.

Somewhat surprisingly, pandemics, viruses, or closures due to communicable diseases are not covered. There has been quite a bit of controversy over this topic in the past year.

Insurance companies maintain that business interruption insurance covers loss from a direct event such as a fire. While COVID -19 did cause closures, there was no physical damage to businesses and would not be covered under their policies. That means companies with these policies had to look elsewhere for relief during the closures over the last year due to the COVID -19 pandemic.

How long does Business Interruption Insurance coverage last?

The length of time that a policy will pay for losses is called the indemnity period. There are two types of policy coverages. The first, limited (or earnings), only pay until the damage has been repaired and the business resumes operations.

It does not account for business revenue that might have been lost as a consequence of the closure. This coverage can limit the length of time it will pay and a cap on how much it will pay in any one month. These policies are generally less expensive than the second option, which is extended (profits) indemnity.

Extended indemnity coverage will pay until the business reaches the level of financial performance from before the disaster. These policies consider that while a company may be physically open after a disaster, it may take a more prolonged time to build its business back up.

Bottom Line

Unexpected losses will occur during the lifecycle of any business. Despite the limitations listed above, business interruption insurance is a vital source of coverage for Canadian business owners that can help offset potential financial burdens.

The income protection that these policies offer can calm fears in the current tumultuous business climate. Knowing that if your company faced closures due to a natural disaster, that your daily operating costs, as well as additional costs, will be covered makes you feel protected. Having such a policy in place could be the deciding factor in the survival of your company. 

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Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.

Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.